Part 4 of 4

Pensions in a Changing Climate

Part 4: Metrics & Targets

This is the fourth and final installment of a four-part report assessing the world’s 100 largest public pension funds responses to climate change and the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The parts cover specific areas from the survey and follow the structure of the TCFD core recommendations. The parts are as follows:

Using AODP survey data, this part explores the performance of the world’s largest pension funds on their approach to strategy and risk management. To ensure you receive the following parts, please get in touch with Peter Uhlenbruch, AODP Investor Engagement Officer, on peter.uhlenbruch@shareaction.org to be added to the AODP mailing list.

Key Findings

This section explores the performance of the world’s 100 largest pension funds on their approach to metrics and targets. The findings in this part cover the following areas: low-carbon investment, climate-related targets, and carbon footprinting.

Finding 1. Only 1% of the assets managed by the world’s largest 100 pension funds are invested in low-carbon solutions

1.1. The world’s largest pension funds are on average investing only around 1% of their portfolios in low-carbon solutions

Our data reveals that on average, the world’s 100 largest pension funds are only investing 1% of their assets in low-carbon solutions, representing around $100 billion. Across only those funds which do publicly report their low-carbon investments (see finding 1.2), the average percentage of their assets invested is 3.8%.

These figures are dramatically shy of the $90 trillion which will need to be invested in low-carbon technology by 2030 in order to build the infrastructure necessary for a successful low-carbon transition. Our data clearly shows that as a sector, the global pension fund community will need to rapidly escalate their low-carbon asset allocation if a successful low-carbon transition is to be realised.

Some leading pension funds are showing that substantially increasing allocation to low-carbon technologies is possible for large pension funds. An analysis of low-carbon investment disclosures from pension funds achieving a rating between AAA and A reveals that on average, these leaders are investing 6% of their portfolios in low-carbon solutions, with the highest reported low-carbon investment figure at 19% of assets under management.

1.2. Only a quarter of pension funds measure and report their low-carbon investments

Only 24% of funds are quantifying and disclosing their level of investments in low-carbon solutions. A further 12% provide broad statements around their low-carbon investing activities, but do not quantify them, while 64% provide no information. This leaves 76% of pension funds who do not provide decision-useful information on their low-carbon investment activities, leaving stakeholders unable to determine whether progress on low-carbon investing is fit for purpose.

Our data reveals a distinct lack of consistency in the frameworks and methodologies used to define and disclose low-carbon investments. Some of the frameworks and definitions used include LCI Registry’s Taxonomy of Eligible Investments, the Climate Bonds Taxonomy, and companies with a set percentage of revenue tied to the low-carbon transition among others. The inconsistent use of such frameworks and definitions leaves stakeholders unable to meaningfully compare and contrast low-carbon investing initiatives among pension funds.

1.4. Renewable energy is the most widespread low-carbon investment

A qualitative analysis of survey responses around low-carbon investment approaches reveals that investing in renewable energy projects is the most popular low-carbon investing activity. Climate-related equity and green bonds represent the next most popular approach followed by certified real-estate, low-carbon aligned companies and SDG-related approaches.

Figure 3: Low-carbon investments*

*Based on a qualitative analysis of survey responses

Source: 2018 AODP pension funds questionnaire, MT1.2

Finding 2. The vast majority of the world’s largest pension funds have no low-carbon asset allocation target

2.1. Just 20% of the world’s 100 largest pension funds have set a low-carbon asset allocation target

Only 20% of assessed pension funds have set a target or policy related to their low-carbon asset allocation practices.

Portfolio level targets and policies are the most common (13% of funds), while 5% set targets for specific asset classes. This leaves 82% of pension funds who have not yet set climate-related targets or policies for their asset allocation activities.

Figure 4: Climate-related targets for asset allocation

Source: 2018 AODP pension funds questionnaire, MT1.4

We noted a range of approaches by pension funds to setting low-carbon investment targets; some funds have set explicit low-carbon investment targets, such as percentage targets against a baseline year or an absolute target. For other funds, low-carbon investment sits under the umbrella of ESG or sustainability targets. Some funds are approaching targets in terms of portfolio decarbonisation and introducing steps such as divestment targets from certain emissions-intensive sectors.

While we commend those forward looking funds taking action to allocate capital to low carbon technology, our analysis of the quality of low-carbon investment targets being set shows that 64% of targets set by funds are at a lower percentage than the current average for low-carbon investment of 3.8% of assets under management (see 1.1). Given that some funds have managed to set targets of over 10% of assets under management, we believe there is scope for all funds, even those with existing targets, to be more ambitious.

Finding 3: Around one third of pension funds are measuring the carbon footprint of their investments

3.1. 32% of pension funds are performing carbon footprinting, the majority of which only cover equity portfolios

Our data reveals that almost a third of pension funds are carbon footprinting the emissions of their investment portfolios.

Figure 5: Pension funds and carbon footprinting

Source: 2018 AODP pension funds questionnaire, MT2.1

A minority of pension funds are undertaking carbon footprinting across their whole portfolios with the vast majority only performing it on active and passive equity, while corporate bonds and real-estate portfolios receive relatively far less coverage.

Figure 6: Carbon footprinting and asset classes*

*Axis indicates number of funds who report footprinting asset class

Source: 2018 AODP pension funds questionnaire, MT2.1

3.2. Carbon footprinting is the most widespread metric being used by pension funds

A qualitative analysis of survey responses revealed metrics related to carbon footprinting (including absolute or relative emissions, carbon intensity, and invested value) are the most common category of climate-metrics used by pension funds. Exposure to carbon-intensive assets or sectors was the second most popular category, followed by ESG research from external service providers, renewable energy exposure, and SDG-related metrics.

Figure 7: Common climate metrics*

*Based on a review of qualitative survey responses

Source: 2018 AODP pension funds questionnaire, MT1.1

3.3. Company engagement is the most widespread use of footprinting data

As highlighted in the chart below, pension funds who perform carbon footprinting are utilising this data in a variety of ways, with company engagement being the most widespread application.

Figure 8: Common uses of carbon footprinting data

Source: 2018 AODP pension funds questionnaire, MT2.1

This finding is significant as it shows the multiple points of value that undertaking carbon footprinting can provide. It is also consistent with research findings from our Winning Climate Strategies report, which revealed how global asset owners with leading climate strategies are creatively applying footprinting data in a number of ways, such as setting pre-allocated carbon budgets for their asset managers.

AODP’s 2018 pension fund survey included a question asking for feedback and challenges on low-carbon investment from pension funds. We briefly discuss some key themes identified in this report. These reflect some of the common barriers identified in AODP’s recent Winning Climate Strategies report.

We noted a perceived lack of opportunities for low-carbon investment. In particular, some funds noted having difficulty finding low-carbon investment opportunities that had an appropriate risk-return profile. Similarly, some noted difficulty in identifying scalable low-carbon investment opportunities. However, other funds commented that they did not have an issue identifying appropriate low-carbon opportunities, and indeed many funds set ambitious low-carbon investment targets.

Some funds noted that a lack of data quality, coverage and consistency from companies was proving a barrier to investment decision making for low-carbon assets. As is reflected in our recommendations to regulators in the earlier parts of this report, some funds voiced their support for company disclosure in line with the TCFD recommendations, to increase data quality and comparability for investors.

Conclusions & Recommendations

In order to support the transition to a low-carbon economy and to avoid the most catastrophic outcomes of climate change, a massive amount of capital needs to be allocated in low carbon solutions; $90 trillion will need to be invested by 2030. Pension funds account for around half of all assets controlled by asset owners globally, and therefore must play an instrumental role in allocating the necessary capital. However, our research shows the vast majority of the world’s largest 100 pension funds have inadequate metrics and targets with which to measure and therefore improve upon, their impact on the climate. This is the final instalment of a four-part series outlining the results of the survey. We have highlighted a number of recommendations relevant for this section.

FOR REGULATORS

Support the development of a low-carbon investment taxonomy

This report highlights the fragmented approach by pension funds in defining and disclosing their low-carbon investment activities. This leaves stakeholders unable to meaningfully compare and contrast approaches. We support the current work of the European Commission in building a sustainable investment taxonomy, and indeed many assessed funds voiced to us their support for this regulation. We call on all other regulators to support such initiatives.

FOR MEMBERS/ BENEFICIARIES

99% of the money being saved in the world’s 100 largest pension funds is not being explicitly allocated to support the low-carbon transition, with only around 1% being reported as being set aside for low-carbon investment. Despite this, the vast majority of these funds have not committed to targets or pledges to increase their investments that support the low-carbon transition. We call on members and beneficiaries to challenge their pension funds to commit to increasing their low-carbon asset allocation, and take the first step to contribute to the green transition.

FOR PENSION FUNDS & TRUSTEES

Increase disclosure and action on low-carbon investment

As has been highlighted in this report, if pension funds are to meaningfully contribute to the low-carbon transition, a huge amount of capital needs to be allocated to low-carbon solutions. However, far too few pension funds are properly measuring and reporting their investments, let alone making pledges to increase low-carbon investment. We call on pension funds to do more to measure and report on these investments (including definitions and taxonomies used) and also publicly commit to increase low-carbon investments.

Improve carbon footprinting practices

A third of assessed pension funds are performing carbon footprinting, and have used footprinting constructively in a variety of ways including company engagement and setting decarbonisation strategies. Clearly, carbon footprinting can still play a valuable role as part of a holistic climate-risk assessment framework, with benefits that extend beyond simply tracking risk. We call on pension funds who are not yet undertaking carbon footprinting to do so for their equity portfolio, for which available tools and services are most developed.

Acknowledgments

ShareAction gratefully acknowledges the financial support of the European Climate Foundation, Finance Dialogue, Hewlett Foundation, and the KR Foundation for this project. These foundations kindly supported this project, but the views expressed are those of ShareAction. More information is available on request.

We would further like to thank the panel of experts who gave their time to provide guidance to inform this research project, and particularly the development of the methodology and feedback during the review process.

We also acknowledge the efforts made and time given to supply information by individuals who were nominated to represent their companies in this assessment.

Find out more

This is the third of four related publications we will make between September and November 2018 to draw attention to the role of global public pension funds in managing the risks and opportunities of climate change. Contact Peter Uhlenbruch, AODP Investor Engagement Officer, on peter.uhlenbruch@shareaction.org if you would like to be notified about the next instalment of Pensions in a Changing Climate.